Royal Bank of Canada (RY) 2011 Q2 法說會逐字稿

Hello and welcome to the RBC 2011 second quarter results webcast and conference call. As a reminder, all lines will be on listen-only mode and we will conduct a Q&A session at the end of the call. (Operator Instructions).

At this time, I would like to turn the call over to Josie Merenda, VP and Head of Investor Relations. You may begin. Please go ahead, Josie.

Thank you. Good morning and thank you, everyone, for joining us. Presenting to you this morning are Gord Nixon, our CEO; Morten Friis, our Chief Risk Officer; and Janice Fukakusa, our Chief Administrative Officer and CFO. Following their comments, we will open the call for questions from analysts. The call will be one hour long and we will post management's remarks on our website shortly after the call. To give everyone a chance to participate, please keep it to one question and then requeue.

Joining us for your questions are George Lewis, Head of Wealth Management; Doug McGregor, Chairman and co-CEO of Capital Markets; Dave McKay, Head of Canadian Banking; Mark Standish, President and co-CEO of Capital Markets; Jim Westlake, Head of International Banking and Insurance; and Zabeen Hirji, Chief Human Resources Officer.

As noted on slide 2, our comments may contain forward-looking statements which involve applying assumptions and have inherent risks and uncertainties. Actual results could differ materially from these statements.

I will now turn the call over to Mr. Nixon.

Thank you, Josie, and good morning, everybody. This quarter, RBC delivered strong earnings of over CAD1.5 billion, which were up 13% from last year. On a year-to-date basis, we have earned over CAD3.3 billion, up 18% from the prior year, demonstrating the strength of our businesses and the diversity of our business model.

This morning we announced -- we also announced a CAD0.04 or 8% increase in our dividend, bringing the quarterly dividend to CAD0.54 a share. We advanced our leadership across businesses in our Canadian Banking, Wealth Management, and Insurance businesses, had strong revenue growth and earnings growth.

The diverse mix of business lines and Capital Markets also enabled us to generate solid earnings notwithstanding the impact that challenging trading conditions had on fixed income trading in the latter part of the quarter. While our trading results were lower than last quarter, we anticipate a moderate improvement in trading revenue in 2011 compared to 2010 as economic market and regulatory environments stabilize.

We do expect trading revenues to remain in the range of CAD700 million to CAD 900 million quarter, similar to past levels that exclude market and credit-related items, which are outlined in slide 6.

As mentioned on last quarter's call, we also settled all claims against MBIA and eliminated our credit default swap exposure. We continue to hold the underlying assets in our trading books. These assets are appropriately provisioned and we are selling down these assets as favorable opportunities arise.

Our investment banking business continued to build momentum and delivered strong results with revenue up 35% from last year. I've talked in the past about our desire to shift our mix in Capital Markets and increase the investment banking component of earnings. As you can see from this quarter's results, we continue to execute against this plan and going forward, our investment banking, the lending coverage rose in all geographies the contribution of the lower risk investment banking business will be an increasingly bigger component of the overall segment in Capital Market.

By delivering strong earnings, we generated internal capital and strengthened our capital position. Our Tier 1 ratio now stands at 13.6% and our TCE ratio at 10.3%. Although we already meet the 2019 Basel III capital requirements, as I highlighted on last quarter's call, our businesses have a number of activities underway to fully optimize capital usage and focus efforts on products and businesses that generate higher risk-adjusted returns. We believe it is essential that Canadian banks not only meet these minimum requirements but their capital plans appropriately provide for the buildup of strong capital cushions in order to be fully compliant with requirements by 2013.

We are well positioned and quite comfortable with our capital plans including our ability to continue to invest and grow our businesses.

Before moving to our business segments, let me spend a moment on a recent topic in the media. There has been a lot of speculation and media coverage lately on RBC Bank. Although I will not comment on speculation with respect to RBC Bank, we do remain focused on turning around these operations and we are making good progress.

I also want to take the opportunity to point out that we have a strong and growing presence in the US through our other businesses, particularly our two larger businesses, Capital Markets and Wealth Management. We remain fully committed to the US market and committed to generating strong returns as we expand our businesses south of the border. We have been building strong relationships, winning key mandates, and gaining market share in the United States and we expect to build on this momentum.

Moving to the performance of our business segments, I will make a few comments and Janice will take you through a more detailed review of the result. Canadian Banking continued to underpin our results, generating double-digit earnings growth from last year. We outperformed in the market, driving solid volume growth of 7% by leveraging our strong branch network and our unmatched ability to cross sell products. We actually expanded our margins in Canadian Banking and had solid operating leverage net of pension expense, which is a reflection of the decrease in the discount rate.

We continue to access more customers through the buildout of our multichannel strategy and we are targeting a 25% volume growth premium to the marketplace. Although market trends point to a slowdown in consumer loan growth, we had growth in commercial loans for the second consecutive quarter as companies regained confidence and continue to invest and build out inventories.

Growing our commercial loan book is an area of focus as we leverage our industry expertise to win new business and grow market share in this high-margin business. While we are managing Canadian Banking to outperform in the market, we are also transforming the future of banking. By investing in innovation and expanding on alternative distribution capabilities, we are evolving the banking landscape.

For example, we are partnering with Google in a new program designed to encourage website adoption by small businesses across Canada. To be successful, small businesses need to be online and again we are leading the market with this opportunity.

We also recently introduced a new online click-to-chat feature which allows clients to interact with customer service representatives real-time around the clock. Our unmatched size and scale gives us enormous potential to generate more volume than peers and drive better efficiencies, enabling us to reinvest in innovative solutions that hopefully will continue to drive top and bottom line growth.

In Wealth Management, we had great momentum across all of our businesses this quarter with earnings up 23% from last year after adjusting for tax and accounting impacts. As a market leader, we capitalized on improving global markets and investor sentiment and grew fee-based client assets through appreciation and net sales and executed greater volume of client transactions.

Our second-quarter long-term mutual fund net sales were the best on record, enabling us to capture 25% of the total industry in Canada and increase our market share to 14.3%. And for the fifth consecutive year, RBC Dominion Securities ranked number one among bank-owned investment dealers according to the investment executives 2011 brokerage report card.

Our acquisition of BlueBay is progressing better than expected with assets under management in US dollars increasing from $39 billion to $43 billion this quarter. This acquisition expands our distribution capabilities and the reach of our global asset management business in Europe and Asia.

Our focus remains on building client relationships both in Canada and abroad, growing our global footprint, and increasing our product offering to solidify our position as a global leader in wealth and asset management.

In Insurance, we grew earnings by 36% from last year and remain focused on growing our market share by collaborating with Canadian Banking and Wealth Management to deliver innovative insurance products through cost-effective channels.

I also want to point out that at the end of the quarter, we closed the sale of Liberty Life. International Banking's net loss of CAD23 million was comparable to the net loss in the prior year. While we were profitable in the first quarter, as I mentioned previously, there are a numerous number of factors at play in sustaining profitability in this segment given the unpredictable nature of timing and levels of DCL.

We continue though to see credit quality improve in our banking businesses and our underlying businesses are showing positive signs of growth.

In the Caribbean, integration efforts are well under way to streamline operations and enhance the client experience. We are continuing to see momentum in RBC Dexia as client assets appreciate, client transactions increase, and we acquire new businesses.

We also had unprecedented success with the recent international survey where institutional investors gave RBC Dexia top marks in the global investor 2011 global custody survey. Not only did we ranked number one in the top three categories, best custodian overall, best custodian overall for EMEA, and best custodian overall Americas, we also received number one rankings in 22 separate categories. These survey results are quite exceptional and reinforce the fact that we provide our clients with exceptional service.

Capital Markets earned CAD407 million this quarter, with solid contributions from our global markets and corporate and investment banking businesses, attesting again to the diversity of that platform.

In global markets, challenging trading conditions arising from the events the Middle East and Japan, continued uncertainty in Europe, impacted our fixed income business, particularly in Europe in the latter part of the quarter. Although global markets revenue was down from the strong levels of last year, I wanted to point out that factoring in out our gain on assets hedged by MBIA from last year, there was only a modest year-over-year decline.

On the other hand, we saw impressive growth in origination and M&A activity in our corporate and investment banking business, which had substantial revenue growth over last year. Over the quarter, although revenue declined, we put more deals on the books with smaller deal sizes than we saw in the first quarter of 2011. Some of the deals we led or advised on during the quarter in Canadian, US, and UK markets included joint book runners for [Rogers] Communications, [CAD1.85] billion dual tranche 10 and 30-year bonds, the largest ever BBB rated deal in the Canadian market; sole book runner for Lloyds Bank's CAD500 million five-year senior Maple bond transaction renewing momentum in the Maple bond market. We acted as exclusive financial advisor to Frontier Gold on its connect CAD2.3 billion acquisitions by Newmont Mining, one of the world's leading gold producers.

And in the UK market, we were the joint lead manager on a GBP400 million bond transaction for Thames Water Holdings, the first lead managed corporate sterling high-heeled transaction for RBC.

Our underwriting and advisory businesses continue to be recognized for their leading ability to serve clients. We placed 11th in the Bloomberg 20, the annual ranking of top 20 investment banks globally by fees, which was up from 14% last year. This was our highest ranking and we were the highest-ranked Canadian bank and our forward calendar continues to remain strong.

You've read about the launch of our new equity electronic trading business, THOR, a smart order router that is designed to help institutional clients compete with high frequency traders and efficiently fill orders while reducing cost for our customers. We remain focused on growing our global client base and Capital Markets by investing in our competitive and diverse product offering to meet changing needs.

In conclusion, we had strong results across our businesses this quarter, demonstrating the strength and diversification of our organization. While we did have some quarter-to-quarter volatility, we are happy with our year-to-date operating result and continue to see strength across most of our businesses. We are executing our long-standing strategy and our business model continues to serve us well as we expand our leadership position in Canada and build our global platforms. We will continue to invest in all of our businesses to provide our customers with advice expertise and the products that they need.

With that, I will turn it over to Morten.

Thank you, Gord. Turning to credit on slides 9 to 11, both total and specific provisions for credit losses increased slightly over last quarter as credit quality continued to stabilize and we saw lower recoveries in Capital Markets. Over the quarter, the Canadian economy showed signs of strength as the unemployment picture improved modestly. Personal bankruptcy filings increased slightly but are expected to decline in the near term as improving labor market conditions reduce strain on household finances.

The impact of these positive signs is apparent. Specific provisions were down CAD10 million in Canadian Banking from last quarter as provisions declined in our residential mortgage and secured personal lending portfolios. Despite these positive signs, we saw credit card specific provisions as a percentage of average net loans and acceptances climb 34 basis points over last quarter to 379, largely reflecting a decrease in outstanding balances mainly due to seasonal spending patterns.

Despite the increase in provisions, this portfolio is performing in line with our expectations.

As the Canadian economy continues to recover and unemployment rates decline, Canadian retail PCL is excited to improve marginally through the second half of the year.

Similar to our Canadian portfolios, we continue to see the asset quality stabilizing in the US although the level of impaired loans remains high. Specific PCL in International Banking decreased by CAD13 million over the quarter as our US commercial portfolio had lower provisions. We expect to see improving PCL trends in the US as the labor market improves and personal bankruptcy rates continues to decline and approach long-term averages.

However, the timing and level of PCL's are difficult to predict and are highly dependent on the recovery of the US and the Caribbean economies.

Before I move on, as you can see on slide 10, I wanted to point out that the gross impaired loans improved by CAD683 million to CAD4 billion. This was largely due to the sale of certain securities classified as loans in RBC Bank USA, which was sold given favorable market conditions.

I also want to point out that this quarter we have expanded our disclosure on page 19 of the report to shareholders regarding our outstanding loan exposure to certain Europeans sovereigns. As you can see, our exposure is minimal.

In our wholesale portfolios, which include our corporate accounts and Capital Markets, we saw stabilization of credit quality this quarter. We had no new PCL in Capital Markets but a net recovery of CAD5 million comprised of a few accounts. This compared to a recovery of CAD27 million in the prior quarter.

Now turning to market risk, management VAR was flat year-over-year and down slightly compared to last quarter. During the quarter, we had a total of four days with net trading losses, with no losses exceeding VAR. The largest loss, which totaled CAD31 million, was primarily due to credit valuation adjustments largely resulting from movements in credit spreads, interest rates, and foreign exchange rates.

With that, I will turn the presentation over to Janice.

Thanks, Morton. As outlined on slide 13, we reported second-quarter net income of CAD 1.5 billion, up 13% from last year, driven by strong performances in Canadian Banking, Wealth Management, and Insurance.

Turning to slide 14, revenue was up 2% compared to last year; however, the mix of revenue has shifted. While trading revenue declined, fee-based revenue increased and represented a larger portion of total revenue this quarter. This rise in fee-based revenue reflects the combination of higher fees generated in our retail business and more M&A and origination transactions in Capital Markets. This ability to shift our revenue mix by capitalizing on market and economic movements demonstrates the benefits of our diversified business model.

Expenses increased 7% over last year, with more than half of this increase arising from an increase in pension expenses in our Canadian retail businesses with the remainder relating to business expansion initiatives. For example in Canadian Banking, we have increased our investment in online and mobile technologies and expanded our branch hours by over 13% while continuing to invest in several initiatives that will make our operations more efficient and more responsive to our clients' evolving needs. And in Capital Markets, we continue to build the required infrastructure, ensuring the proper financial control and risk management systems are in place to support our growing businesses and to meet the requirements of increased regulation.

Let me now take you through a detailed performance of our segments. Starting with Canadian Banking, our net income of CAD851 million was up 16% from last year as solid volume growth of 7% translated into 6% revenue growth and the provision for credit losses declined. Compared to the prior quarter, net income was down 4%, largely due to seasonality including fewer days in the current quarter. Expenses were up 6% from last year and essentially flat from the prior quarter. More than half of this increase relates to higher pension expenses and the impact of the harmonized sales tax.

I wanted to point out that Canadian Banking not only has the impact of direct pension expenses, it also absorbs proportionately more pension costs associated with the functional groups supporting that business so the impact of rising pension expenses is larger than one might think.

Year-to-date, we had negative operating leverage of 1.5%. However, if you exclude the higher pension expenses and the impact of HSB, our operating leverage jumps to a positive 3% as revenue growth outpaces expense growth in this business. On this same basis, our year-to-date efficiency ratio improves 140 basis points to 45.9%. We continue to target an efficiency ratio in the low 40s over the medium term and we are making ongoing investments in the business to achieve this.

Moving on to Wealth Management, net income was CAD220 million, up CAD130 million from the prior year and flat from the prior quarter. We had a number of accounting and tax adjustments that impacted net income in the comparative period. Excluding these adjustments, net income was [CAD165] million, up CAD34 million or 23% from the prior year primarily due to higher fee-based client assets from capital appreciation and net new fund sales and higher transaction volumes.

Compared to the prior quarter and factoring out items of note, net income was down CAD25 million or 12%, largely due to the impact of fewer days in the quarter and BlueBay performance fees earned last quarter and lower transaction volumes as uncertain market conditions reduced client activity in the latter part of the quarter.

In Insurance, net income was CAD146 million, up CAD39 million or 36% from last year, driven by net investment gains across most businesses, lower auto and life claims costs, and business growth. Early sales indicators are very positive on our newly launched life and annuity products and we continue to focus on claims management activities to maximize savings from auto reform. However due to the nature of this business, it can take a few quarters before this translates into any bottom-line impact.

International Banking had a net loss of CAD23 million as compared to CAD27 million losses in the prior quarter -- in the prior year. Lower provision for credit losses as credit quality continued to improve and stronger results in RBC Dexia were partially offset by spread compression in our banking businesses primarily in the Caribbean.

Over the sequential quarter, earnings declined by CAD47 million. Almost half of that decline relates to a favorable reversal of litigation provisions in Caribbean banking in the prior quarter. The remainder of the decline was largely driven by tighter spreads in our Caribbean banking business. We saw growth in RBC Dexia as improving markets led to higher fee-based client assets and increased client activity.

Turning to Capital Markets, net income was CAD407 million, down CAD95 million or 19% from the year ago, primarily in fixed income trading. This was largely as a result of the gain related to assets hedged with MBIA of CAD84 million after tax and compensation recorded last year. Factoring out the MBIA gain from last year's results, Capital Markets net income was relatively flat year-over-year.

Fixed income trading was also negatively impacted in the latter part of the quarter by the challenging trading environment especially in Europe. We had strong corporate and investment banking growth of 35% as issuance activity significantly increased, driven by higher origination, M&A, and loan syndication. Compared to the prior quarter, net income was down CAD206 million or 34% from a record first quarter due to lower trading activity this quarter and a gain of CAD49 million related to the settlement of MBIA last quarter in our fixed income business as well as lower origination and lending activity.

Expenses in Capital Markets increased over last year as our businesses expanded in Europe and Asia and we incurred higher infrastructure spend. Compared to last quarter, expenses were down, driven by lower earnings.

At this point, I will turn the call over to the operator to begin Q&A. Please limit yourself to one question and then requeue so that everyone has an opportunity to participate. Operator?

(Operator Instructions). Robert Sedran, CIBC.

Good morning. Gord, if I take your new dividend, the midpoint of your target rate target range would imply about CAD1.20 run rate. So is the take away from the move that you believe the sustainable run rate is closer to the CAD1.26 that you reported last quarter and the CAD1.03 you reported today? Or is the run rate really the wrong way of looking at it given the Capital Market's volatility?

That's a tough question to answer given limitations on expectation. The way I would answer it, Rob, is that if you look at where we are for the first half, we are about the midpoint of our range. Our earnings at a little over CAD3.3 billion are pretty much on or slightly ahead of our plans for the year. When we look at our businesses going forward and our expectations, we feel quite comfortable in terms of where we are with respect to being in the midterm range and our -- certainly our hope and expectation is that we will trend down to the lower end of that range as we move forward.

So I think it's a reflection of very strong first-half results and a continued expectation that the environment will remain quite positive and the fact that our capital levels continue to be very strong and put us in a position where we have that flexibility.

Okay, so it sounds like the latter, then. You kind of look through the quarter-on-quarter volatility and you believe your annual earnings power sustains this dividend, basically?

Yes, you know, the fact of the matter is if you look at some of that quarter-to-quarter volatility, obviously Capital Markets account for a portion of it and when we look at our capital markets business, it's a bit like last year although again some intra-quarter volatility. You know, we are pretty well on expectation in terms of our capital markets business for the year.

And if the earnings were smooth, perhaps the market would like it better, but unfortunately in that business we tend to look at it more over a longer term period and I would say we are pretty much on expectation -- on our expectation, not necessarily yours.

Got it, thanks.

John Reucassel, BMO Capital Markets.

Thank you. A question for David McKay. David, just your spreads were relatively flat in the quarter, which is different from what we have seen at others. So maybe you want to talk about what happened in the quarter and your outlook for spread.

And then a broader question, the advertising that I see and hear at least here in Toronto is on the radio, the HELOCs are -- come to Royal because the HELOCs are 50 basis points cheaper. And on the TV, it's -- switch to Royal because we will give you some gift vouchers and other fee rebate. So it appears that you are competing a lot on price but I don't know if I'm getting the whole picture and I would be surprised if Royal was competing on price given the brand value. So maybe you could talk a bit about the advertising campaign and the strategy around that.

Start with HELOCs, Dave.

Sure, good questions and I think the reasons our margins have been stable I think is a core focus on our value proposition. As you know, looking at our convenience offering, our particular advice offering is very strong, so we've been very good at managing our business not succumbing to some of the value-destroying pricing tactics that are in the marketplace right now and growing our volumes at a healthy rate and managing our margins at the same time.

We certainly, John, benefited from the strength of our deposit franchise in this area, where we have seen some margin expansion and very, very strong growth, and that has helped offset some of the very aggressive pricing strategies that you are seeing in the marketplace around mortgages, not just HELOCs in the marketplace, but mortgages in general as we go through what is traditionally a very competitive spring mortgage season.

So core focus on our value proposition, our advice promise has resulted in margin expansion year-over-year and stable margins quarter-over-quarter. So I think that is the primary message that we are sticking to our core expansion.

Part of the tactical initiative that you see in the newspaper, the prime plus a half versus prime plus one for all our other competitors, it's an obvious opportunity for us to capitalize on what we feel is a mispricing in the marketplace that at prime plus a half, we are earning very strong ROEs, very, very strong ROEs, and we are able to capitalize on that mispricing and acquire new customers and offer a very good value proposition.

So value for money is one of our four core pillars of customer need that we compete on, as you know, convenience, advice, service, and value for money. When you see market dislocations like we have in HELOCs and value propositions to customers that can generate high ROEs, it makes perfect business sense to go after that type of market opportunity particularly when you can earn good returns.

So it is a very successful strategy. You can see we have continued to roll it out across the country, offering great value to customers and good returns to shareholders. And we are going to keep doing it.

Okay, just the outlook for spread?

But I think it's important to note that we have not changed our pricing on HELOCs. This has been the case for the past --

Right, we are not lowering prices, John. As Gord mentioned, we have been at prime plus a half on new originations for the past two years and we moved it up from prime to prime plus a half on new originations. As you know, we did not reprice our existing back book. It's still at prime, so this is for us margin expansion rather than margin decline. It's very, very healthy business for us.

Okay, if you look at margins going forward, assuming that you continue to have success on the HELOC side, can you sustain these current margins or are competitor pressures going to put downward pressure on that?

There is a couple of driving forces of margins going forward. So systematically margins are affected by the interest rate environment, as you know, and if we do see rate increases in the latter half of the year, I know the July rate increase is in question now, but certainly that serves particularly with the strength of our deposit business and the huge momentum that we have in core deposits, as you see, that serves as a boost to margins if we get a higher interest rate environment.

Know the journey there in prime [BA] compression can be a little challenging, but overall higher interest rates expand margins. That is going to be offset by the environment and the consumer lending side that is very competitive and you are seeing compressing margins there.

So all in I would say as long as we see some modest movement forward in short-term rates, they should serve to offset compression on the lending side. So our view has not really changed. We are really seeing kind of a neutral margin environment.

Sorry, I will stop after this, just so if there is no rate increase, though, is the potential for tighter margins or can you still manage to flat margins without a rate increase?

It is a challenging market. Our goal is to manage towards flat margins, but you may see a slight decline. I think that's a pretty consistent theme out there. There is some very aggressive pricing on the consumer lending side in the marketplace right now. We have done a good job in growing our business and not following the market down in many areas but it's a challenging environment.

I think a lot will depend, John, on what happens with respect to the mortgage market and because that's where you are seeing some pretty unusual activity and is probably having the biggest pressure on margins. So I think one of the issues is our people going to back away from cutting profitability and that proportion of their book because some of the activity we've seen in the mortgage market almost implies a -- very low margins to say the least.

Okay, thank you.

Gabriel Dechaine, Credit Suisse.

Also on Canadian Banking, good morning, by the way. On the Canadian expenses, we have had four straight quarters of negative operating leverage in Canadian Banking. I am not clear on the message around expenses here. Is this something we should expect to see continue in -- as we head into 2012?

Also one on the Basel III 7%. Is there a way you guys can send us the reconciliation of how you get there? I am having trouble doing that. Is this really the result of the internal models being improved by OSFI that you talked about last quarter that reduce your counterparty credit risk-weighted asset inflation?

Why don't I take the expense question? Certainly I think as Janice mentioned, half of our 6% expense increase is due to pensions in HSP. So the management run rate here as long as we see a higher rate environment in those pension liabilities and the discount rate comes back to where it was, we should see a lower expense growth rate.

So 3% is our when you normalize for pension costs is our growth rate, which is allowing us to invest in the business --

-- or operating leverage.

Well 3% expense growth, too. Both. So we've got a 3% expense growth rate with 6% revenue growth. So we are actually net of one-time pension costs generating a healthy operating leverage and that is our focus going forward. We still have to invest in the business, have to expand our channels, and we're being able to do that in the 3% to 4% expense growth rate range, as you see have seen from the last two to three quarters. So there are some underlying factors there you've got to pull out.

Before the Basel thing, can you quantify any of the margin preservation, if you will, benefit of having a lot of your distribution or all your real estate secured distribution being proprietary?

Certainly I think our mortgage specialist salesforce allows us to originate very, very strong volumes in a cost-effective manner. There's no doubt we feel that is a competitive advantage, along with solid volumes through our traditional branch channel also, so making the best use of our fixed cost base.

I think we've done a lot of work in optimizing the volumes through our fixed cost base and redeploying employees to high-growth areas and driving greater traffic through our networks. So a significant amount of work by the management team in optimizing our cost structure.

So, Gabriel, is your question with respect to how do you get to a 7% TCE on Basel III because you can't reconcile the underlying components? Like which component are you thinking of?

You know, maybe we could do this offline. I've already asked -- that's a third question. I don't want to abuse the privilege here.

Okay, why don't we do it offline and we can take you through some of the major impacts.

Thanks.

(Operator Instructions) John Aiken, Barclays Capital.

Good morning. I just wanted to -- we have had the questions on domestic margins. I wanted to drill down on the international front. It was mentioned a couple times, spread compression out of the Caribbean was what led to the bulk of the decline.

What was really driving behind that? How much did that contribute to the sequential decline in margins? Also, just as an add-on to that, what has been the US experience?

It's Jim Westlake, John. In the Caribbean, it's really a combination of two things. Number one, compression, but volumes are challenged as well. The economics in the Caribbean have not bounced back as much as we would like, and so we are still seeing pretty soft markets generally there. In the US, the spreads has been very flat, really through the whole quarter.

Thanks, Jim. Any outlook or expectations of improvement in loan volumes in the Caribbean, or are we status quo for the next little while?

Well, I think that we should start to see things pick up as the year goes on. We are seeing a little more strength in the consumer side right now, which is a good sign. The business in commercial still remains fairly flat.

Thanks, Jim, appreciate the color.

Michael Goldberg, Desjardins Securities.

Good morning. In increasing your dividend, you had to make the case to your board about your sustainable earning power. Would part of that case be sustainable CAD700 million to CAD900 million quarterly trading revenue?

More broadly, would it also be that your shift in focus, the increased investment banking and lending in capital markets, should result in much less volatility in capital markets overall?

Yes. I'm not sure if there's a question baked in that, Michael, but I think your assumptions are quite accurate. We have tried to, as Mark Standish said last quarter, I repeated this quarter, tried to get a line of sight in terms of our current expectation on those trading revenues being CAD700 million to CAD900 million.

And we have been shifting and growing the other component of the investment banking business. We continue to see that side of the business, which is less volatile, continue to look quite strong in terms of the forward calendar. And if we do start to see some stabilization in the euro bond markets, because the problem with the euro bond market is not just very little and challenging secondary trade. There's been very little in the way of new issue as well just because of the uncertainty and so forth. So certainly that is something that we would hope to see as the year progresses.

I might add in the terms of the mix this quarter, though, I think when you look at the earnings mix this quarter we are pretty well on our sort of objective of 50% banking, 25% wholesale, 25% the balance. I think the numbers are somewhere around 52%, 25% for Capital Markets, and 23% for Wealth and Insurance and Banking. If you normalize our International Banking levels, you get pretty much to that business mix.

So I think that we do think that business mix does provide some degree of stability particularly if we can reduce some of the volatility in the trading businesses. That has been our objective.

I don't know, Doug, whether you want to add anything to that in terms of the investment banking side.

Yes, I think, Michael, the thesis is that in Canada, we've got a good next. We have a strong lending book and we have good relationship with issuing clients, and so you were seeing nice origination. In the US, we've been working pretty hard at expanding our lending relationships since the meltdown a couple of years ago and we have put on a number of new names and it's really starting to pay off in terms of origination in the Debt Capital Markets, Equity Capital Markets, high yield. We are leading a number of deals in our revenue in the US and actually we split it out in Janice's presentation. You can see that it's sustaining high levels and the book looks good for this quarter.

In the UK, we do not have the kind of corporate relationships that we have in the US and Canada and we are building our investment bank and loan book to build those so that we will have a better distribution in terms of origination between sovereigns where we are focused now and sovereigns and corporates going forward.

So we continue to build out the client relationships and it smoothes out the revenue through the cycle.

Thanks. If I could ask one more, slide 13 of your presentation clearly makes the point that two businesses dominate your earnings, Canadian Banking and Capital Markets. Canadian Banking, which now seems to be under increased competitive pressure and with some slower growth, and Capital Markets, which we know can be volatile. Do you feel that this mix provides adequate other sources of growth to add to what may be slower growth from Canadian Banking?

Michael, I would highlight that when you actually put wealth and insurance and combine them, they are roughly the same size if you look at that chart as the Capital Markets side. If you look at the International Banking side, that is where to some degree at some point you have to normalize International Banking earnings. So if you -- that has obviously been a challenged area over the last number of years, but if you assume that you would start to get a turnaround in that, then you get pretty well to the business mix that we have been targeting, as I said in my comments, which is somewhere around 50-25-25.

And we take a slightly different perspective in terms of the growth dynamics. We continue to see that there is good opportunities for investment in growth in all of those businesses. And that includes our Canadian Banking business where we continue to think that there will be opportunities notwithstanding the fact that there may be some short-term pressure on existing margins and so forth. We still think there's opportunities for growth.

So when you look across that balance of businesses, I say we tend to look at it in a bucket of some roughly 50-25-25, and we think there's good opportunity for capital investment in those businesses. I think one of our objectives is to make sure that we do a good job in terms of decision-making around deploying capital in those areas where we can generate not only higher growth but also reasonably good returns as well.

Thanks very much.

Mario Mendonca, Canaccord Genuity.

Good morning. Gord, in your opening comments, you or perhaps it was even Janice, you were talking about having a pro forma Basel III ratio of 7% plus and that it was important to build a cushion. In that context, could you provide an update? What are you hearing on the systemically important financial institution rules? We understand that we're going to hear something in July. Is there anything you can offer us now on SIFI?

And if you could sort of tie that into the dividend increase, does it make sense to raise the dividend the way you did in the context of the uncertainty associated with SIFI?

I addressed the dividends firstly up front. Our earnings growth at roughly 18%, our dividend increase at 8%, we are very comfortable. It's not going to have a material impact one way or the other given the capital that we are generating internally. So we are quite comfortable on that front particularly as I say when we look at our sort of forecast going forward and our current capital levels, we feel quite comfortable.

With respect to SIFIs, again this is all sort of I should said hearsay. Obviously we have a lot of discussions with regulators, but I think it's still a bit of a moving target. But the expectation is sometime in the early part of the summer there will be some form of release in terms of SIFI expectations or criteria. And what we are hearing is those criteria will basically put potential SIFI candidates in buckets with the very highly systemic institutions being in a much higher bucket than the lesser systemic institutions depending on whatever those criteria are, which I suspect are going to be things like size of balance sheet, complexity of businesses, etc.

In terms of the impact on the Canadian banks, again it's hard to say. Basically what our expectation is and what we have heard is that none of the Canadian banks will be global SIFIs. The expectation is we will all be national SIFIs and I'm not sure what that means in terms of buffers, but I think what you can expect generally from the marketplace is whatever the minimum requirements are, banks are going to have to have some kind of buffer to make sure they are above the minimums so that they don't slip below the minimums and put themselves in a position where they are to some degree outside with those limits.

So our expectation is that the Canadian banks will all be in the same category, likely national SIFIs, be very surprised if we were global SIFIs based on what we have been told. Although again, they haven't released their criteria and nothing is certain until it's finalized. But that's our current understanding.

Is it still your view that Royal Bank would not be treated any differently from any other Canadian banks?

We have been told by basically our regulators, etc. that the Canadian banks will likely all be the same in terms of their requirements. Now again, there are domestic and then there are international discussions and negotiations, so things can certainly change. But that would be our expectation.

And my final related question would be, if there were a buffer of, say, 200 basis points, do you think the Canadian banks would still feel it necessary to get there much earlier than our global peers, say, by the end of 2012 or 2013? Or would the buffer essentially extend the timeline somewhat? Like still wanted to get to 7% in the previously stated timeline but the buffer would be something you would extend a little further -- (multiple speakers) what would your thinking be?

Our expectation would be the buffer would be something that would be extended further. The benchmark for the Canadian banks of meeting the 2019 requirements by 2013 I suspect would be viewed as sufficient, although you are asking that really the question should be asked to regulators, not to ourselves, because ultimately that will be the determinant.

But my expectation is that if there was an incremental buffer that there would be certainly a timeline ultimately to grow into whatever that would be. But I would be very hesitant to put a number like 200 basis points because as I say based on what we hear, I suspect it will be some form of sort of graduated buffer so that not all SIFIs, whether they're global or national SIFIs will have the same buffers. I would be very hesitant to just put a number on it because I think it will be much more graduated.

Thank you very much for your help.

Cheryl Pate, Morgan Stanley.

Good morning. A question on the U.S. Bank. About a year ago we were talking about a couple years to turn around and right-size the business. So I guess first, are we still looking at that same timeline, meaning are we about halfway through? Or is it going to be a longer tailed turnaround story?

And secondly, if we can maybe get some color on some of the initiatives that have been completed to date and what is still to come and how to think of that in relation to the cost base and efficiency ratio over a longer term?

Jim Westlake, are you on the line?

Yes, I sure am, Gordon. Thanks, Cheryl. We are involved in a very large number of projects that we are doing to affect RBC Bank. A number of them that we have done is very much rightsizing a lot of the staffing. We have settled on a common operating model. You will recall that we had a large number of banks that have been accumulated over the years and had not been on that system. We have done that.

We've done a lot of product changes, enhancements in order to get a portfolio that we think is proper. We have redone our commercial business and gone through and made it much clearer what is handling the branch versus commercial offices.

So on and on, a lot of those types of things that are not real noticeable necessarily from the outside but require a lot of work. We are on track with the timelines that we had originally intended and continue to make progress. And while the numbers have not come in line with that yet, they are largely still driven by both PCL and by losses on the investment portfolio as opposed to ongoing operations.

If you normalize out of that from a revenue and a cost standpoint, we continue to make progress while modest though, on the efficiency ratio.

Great, thank you.

Steve Theriault, Bank of America Merrill Lynch.

Thank you, a couple of I think relatively quick questions. First to Dave McKay, you talked earlier about value destroying strategies. If I look on slide 15 of the deck this morning, loan growth in commercial looks a little light I think versus what we have seen from peers at I believe it was 3%.

So are you losing share a little here and happy to do so because of tighter margins and increased competition? Or is there something else going on there?

Thanks, Steve. Great question. We had a similar question in Q1. I think the answer is a bit of both. We are not happy with our 3% growth in commercial loans for a couple reasons. One, I think that we have passed on some deals that we thought weren't economically feasible, so there is a pricing element to it where we pass on some market share.

Having said that, we have got -- continue to build this pipeline and get this back up to at least market if not the 25% that we have targeted in volume in excess of the market average. So I think when we look at our pipeline, it's very strong. When we pulled back in a couple of sectors two years ago, our volume, our pipelines diminished and it takes a while to build that up, so you're seeing a bit of a lag in rebuilding our pipelines, having pulled back in a couple of sectors. So that's part of the answer is getting back to market level and exceeding market level volumes.

Part of it is that there's some competitive dynamics that make certain business deals unattractive and you've got to maintain a discipline. So all said, we are being selective but we want to see better performance and we are not happy at 3%.

What were those couple of sectors?

We don't really disclose that. Particularly I would say during the downturn in real estate lending, commercial real estate. We paused and that is a long-term pipeline to build as -- by the time you get construction draws and whatnot, it's not a business that you can immediately turnaround from an outstanding balance perspective. But we have a very strong pipeline and we should see that business start to grow. That's where the majority of the activity in commercial financing seems to be in the marketplace right now.

So we felt the pain of pulling back a couple years ago, but we are being quite aggressive in that market place and the pipeline is strong.

Thanks and one more quick one if I could probably for Doug or maybe Mark. I just want make sure interest on the trading side, you mentioned trading was particularly weak at the tail-end of the quarter and again particularly in Europe. I hear the client activity was little light but was that the case strictly in Europe or was there anything unusual in terms of trading losses going on there towards the end of the quarter?

It's Mark Standish. There was nothing unusual there. DCM activity globally was certainly softer in Q2 than it was in Q1 and that drives a lot of the sales and trading activity.

In Europe unlike in Canada and the US, there's less connection to a broader corporate relationship, as Doug said, it's more of a sovereign business. So in Europe, we basically had to be more active in supporting the new issue activity that we were able to bring.

So net-net, it was a disappointing and soft quarter. While we did keep DCM activity reasonably stable with the prior quarter, it's a marketplace right now that's obviously dealing with a lot of uncertainties and we are keeping our business fairly close to home. As Gord said, it's something that later on in the year we expect to see a turnaround in.

Thanks very much.

Operator, we have time for just one more question.

Sumit Malhotra, Macquarie Capital Markets.

Good morning. Thanks for taking my question. Probably for Gord, maybe George Lewis, a two-parter on the acquisition front. I wanted to get a little bit more color on how you are feeling about the build out of your global asset management business and what opportunities you are seeing there?

And related to that, I notice your partners at Dexia took a large charge this morning not really saying that means anything here except to ask your view on that business, which I know has struggled with the interest requirement over a period of time and whether longer-term that's an asset that you would -- that would fit the acquisition criteria you now seem to be working with in terms of wealth management and lower capital intensive businesses?

Sure, thanks very much. I'll take that. In terms of our asset management business, we are very pleased with the performance of that business. Recall a third year of our anniversary of the Phillips, Hager & North acquisition, and so that has turned out extremely well, resulting in our industry-leading sales in Canada in terms of our mutual fund business.

We've just recently completed the acquisition of BlueBay Asset Management and from an operating perspective, we are early days but again, we are very pleased with the growth of that business. Its assets are up 7% in US dollars since we acquired the business, strong net sales.

Our real focus is on leveraging that acquisition in the near term. It brings us more distribution in Europe and Asia, it brings us a global fixed-income capability to complement our existing asset management business. So we see strong organic growth opportunities in our globalized asset management business as part of our RBC Wealth Management business.

We are always looking opportunistically for opportunities to build our global asset management business by way of acquisition. It is a very high margin business for us within the RBC Wealth Management segment, so as opportunities come along, we will definitely take a look.

On RBC Dexia, you're right, there was an announcement this morning in terms of a write-down of some of their US assets. We obviously can't and would not comment on it and really have not seen anything other than the press release. In terms of its impact on RBC Dexia, I think strategically it continues to be a business that we like very much. It is a business where I think there will continue to be opportunities.

Going forward, I think the uncertainty over RBC Dexia has been around for a while in terms of what their longer-term desires intentions are and we continue to monitor that and we think there will be lots of opportunities and flexibility as we move forward. I don't think this morning's announcement has any impact on that, though.

Yes, I wanted to make sure. This is still a business and obviously -- it's safe to say you are considering all your options and your operations outside of Canada, and this is still a business that you are positively disposed to, that's fair to say?

Absolutely.

And if I wrap up, very quickly just for Mark or Gord, on the comment you gave to Steve about the softer trading conditions at the end of the quarter in Europe, is it fair to say that that has continued thus far in Q3?

Yes, I think in Europe -- the trading conditions are still difficult. I would add to Mark's remarks that it's also quite competitive over there. There's a lot of banks involved in primary dealerships and otherwise. I would say that also on Gord's remarks, the origination in the US and Canada has been quite good. And the book on the M&A side and the new issue side is quite strong. I don't know, Stan, if you have anything else.

No, I think that everyone is aware of the issues that are specific to Europe right now. On the positive side, we are seeing a much broader business in Canada and the US, which we are enjoying. I should also note that we focused on the FICC business. While certainly the sales and trading results coming out of foreign exchange and equity are down a little bit, we are certainly seeing very good client activity there and very good flow there. So that's not just a Canadian or US activity. We are also growing that business in Europe and that's actually going quite well.

Thank you for your time.

Thank you very much, everybody, for participating in this conference call. We appreciate your questions and look forward to chatting again in the third quarter. Thank you very much.

Thank you for joining. That concludes today's conference call and webcast.